Entering China’s Medical Marketplace

Once severely restrictive in practice and economically limited, markets in China are beginning to hold brighter prospects for successful entry by foreign manufacturers and suppliers. Medical product companies looking for product import, distribution and manufacturing opportunities in China will find promise in recent trends including a growing economy, a rising middle class with growing per capita incomes, an increased awareness of the benefits of better healthcare, and China’s entry into the World Trade Organization (WTO). Through the discussion of the available business strategies, this article will assist medical product companies in addressing new opportunities in an ancient land.

Figure16: Selected Statistics on China, 1978, 1997, 2010(E)

1978 1997 2010
GDP, purchasing power parity $1.1 trillion $4.42 trillion $8 trillion
Portion of World Economy that China Accounts for Approx. 5% Approx. 12% Approx. 20%
Per Capita Income $200-$300 $800-$900 N/A
Major Cities Per Capita Income $900 $2,300 N/A
Medical Device Market N/A $1.3 billion N/A
Medical Device Imports from U.S. N/A $207 million N/A
Number of Healthcare Institutions 169,732 315,033 N/A
Number of Hospital Beds 1,850,000 2,903,000 N/A
Number of Hospital Beds per 1,000 persons 1.93 2.35 N/A

Sources: CIA World Factbook; U.S. Department of Commerce; International Monetary Fund; Wen Hui Bao Daily Newspaper

Economic Trends

Economically speaking, things are looking up. Reports on China’s trade efforts show increases in both importing and exporting of goods this year, when compared to the same time frame in 1999. During 1978-98, real GDP grew on average by about 9% per year, contributing to a near quadrupling of per capita income over the same period. The number of people below the poverty line was reduced from more than 200 million in 1981 to about 70 million in 1995. The rise in income levels of both rural and urban employees has considerably improved the standard of living in China, and, at the same time, has brought about a rise in personal saving. The amount of savings of urban and rural residents has increased from 21.06 billion RMB ($2.63 billion) in 1978 to 1,520.35 billion RMB ($183 billion) in 1993, 71.4 times the 1978 figure, according to 1999 reporting from the U.S. Department of Commerce, U.S. Commercial Services. And, within the last 20 years, the number of healthcare institutions in China has nearly doubled (Figure 16).

Trade Boundaries Fall

China’s accession into the WTO created significant opportunities for foreign medical companies to expand medical product exports. China’s commitments in the WTO address distribution, retailing, maintenance, repair and transportation. Implications of changes in distribution, tariffs and insurance are of particular interest.

Before the WTO, foreign firms had no right to distribute products into Chinese markets that were not manufactured in China. Foreign companies also could not own or manage distribution networks, wholesaling outlets or warehouses. Current restrictions on services auxiliary to distribution—such as rental and leasing, air courier, freight forwarding, storage, advertising, technical testing and analysis and packaging services—will be phased out in three to four years.

On U.S. priority industrial products, tariffs will fall to 7.1% with the majority of tariff cuts officially implemented by 2003. Specifically, these tariff cuts include wood, paper, chemicals, capital and medical equipment.

China will expand the scope of activities for foreign insurers to include group, health and pension lines of insurance over the next five years. (These lines of insurance represent about 85% of total premiums.) In addition, while the U.S. agreed to China’s request to limit foreign equity participation in life insurance to 50%, China agreed to accelerate the elimination of geographic restrictions. Furthermore, instead of having the Chinese government choose joint venture (JV) partners, life insurers may now choose their own JV partner. For non-life insurers, China will allow branching, or 51% ownership on accession, and will allow wholly foreign-owned subsidiaries in two years. Also, reinsurance is completely open upon accession (100%, no restrictions).

Despite the many advantages that China’s accession to the WTO offers foreign medical device companies, some negative factors will continue to exist. For example, some foreign medical device companies already in China are attempting to renegotiate contracts with JV partners to take advantage of the WTO concessions made by China. As these companies try to restructure business arrangements, one of the major pitfalls is going to be regulatory approval. As for new contracts, changes in pre-existing (prior to WTO accession) contracts between foreign and Chinese parties must be approved by the Ministry of Foreign Trade and Economic Cooperation (MOFTEC) or by local authorities. Chinese authorities are known to complicate the process; thus, obtaining approvals for amended contracts will be difficult.

Furthermore, foreign companies in China will probably have to set up new entities, such as holding companies, or importing products and distributing them domestically. The Chinese government will most likely not allow foreign companies to use existing JVs in that capacity.

Market Entry

The overall size of China’s medical device market is estimated at $1.4 billion. Although considerably smaller than the markets of the U.S., Japan and some major European countries, the potential for growth is significant. In 1998, U.S. medical device exports to China totaled about $240 million, representing the largest share (about 35%) of that market. Japan, Germany, France and Israel are the U.S.’s strongest competitors. Quality is an important factor in the purchasing decision; however, affordability is oftentimes more important.

Foreign medical device companies selling in China and interested in covering the majority of the country should rely on a combination of distribution channels to reach end users. This is true for both foreign companies exporting as well as those distributing locally made goods. Foreign companies wishing to ex-port products generally choose among state-owned distributors and foreign distributors.

Foreign companies that have a physical presence in China can have direct distribution channels via their joint ventures and/or wholly foreign-owned enterprises (WFOEs). Whichever strategy is chosen, targeted marketing and promotion to the Chinese medical community is crucial.

Export Distribution Options

Medical device companies that do not have the intent or resources to set up staff in China to establish and monitor their distribution networks usually opt to utilize the resources of Chinese distributors. As a result, someone in the corporate or Asian headquarters is designated to periodically review the performance of the Chinese distributors(s). Chinese state-owned distribution companies, privately owned trading companies, and Hong Kong distributors are the three options currently available to foreign manufacturers.

Figure17: Recent Distribution Agreements

U.S. Manufacturer Date Product(s) Distributor/Location Comment
(San Diego, CA)
5/00 BioZ.com Chang Sheng Medical Equipment (Beijing) Exclusive distribution rights in all provinces, excluding the 5 southeastern provinces & Hong Kong (HK)
Massachusetts Medical
(North Point, HK)
Exclusive distribution rights in the 5 southeastern provinces as well as HK
(Irvine, CA)
12/99 CRYOcare System Charlson International (HK) Opened a training center at First Military Medical University Hospital, Guangzhou
(Melville, NY)
2/00 MRI (Echo) Evergreen Imaging
Part of the large distribution company, Evergreen
(Franklin Lakes, NJ)
5/00 Vascular access products Chindex International
Also started providing logistics services 6/00

Source: Pacific Bridge Medical

There are two types of state-owned distribution companies; foreign trading companies (FTCs) and industrial trading companies (ITCs). FTCs are authorized, experienced groups that have an established infrastructure to deal with foreign trade. FTCs normally have a broad reach and can sell to multiple provinces in China. Unfortunately, these firms tend to rely on their existing network, rather than develop new business. In addition, they generally do not specialize in marketing (or promotion), but, rather, end up functioning in many cases as “order takers.”

ITCs are newer and smaller than FTCs and are administered by the respective industrial ministries and bureaus. ITCs have a better understanding of the specific products they are trading than FTCs, but they are generally limited in their geographic focus.

Often good alternatives to the state enterprises, privately owned trading companies have emerged over the last three to five years. They are, in general, more motivated, entrepreneurial and market oriented than state-owned enterprises. Despite these advantages, each private distributor group should be carefully considered on an individual basis. One factor to consider is that privately owned trading companies usually do not have large cash balances to allow inventorying of medical products. Therefore, there is a risk that if one major client leaves the distributor, the entire trading company could collapse. These companies are generally also limited geographically and sometimes are not authorized to engage in foreign trade.

A Hong Kong distributor will be familiar with both Western and Chinese business practices and can oftentimes identify appropriate end users, import/export corporations and local distributors in China.

Some Hong Kong distributors are knowledgeable about Chinese business, and the communication can be effective as they normally know at least the Mandarin and Cantonese dialects. Hong Kong distributors, however, normally take a sizeable margin, which increases the selling price. This may limit their effectiveness in China’s price-sensitive market.

Foreign medical device companies wishing to stay “close” to their Chinese distributors or to have a local presence can do so via a representative office. A representative office can perform liaison activities in China, but is not supposed to engage in such profit-making commercial activities as importing and selling goods or issuing invoices. Representative office staff in China will target and work with customers while the local distributor eventually finalizes the sale.

Distribution Options for Products Manufactured in China

The system for distributing medical products made in China is more straightforward than the system for products made outside of China. A company manufacturing medical products in China can avoid high import tariffs besides having more control over the business in general. To this effect, a foreign company will set up a foreign investment enterprise (FIE).

Figure18: Foreign Investment Enterprise Structures

Advantages Disadvantages
Equity Joint Venture (EJV)
Law and regulations provide a relatively complete structure of rules and procedures for establishing a venture in China.

Preferred investment vehicle of the Chinese government. Many incentives offered.

Provides a separate vehicle for selling to the domestic market.

May be included in the annual plans for raw material allocations and may procure goods at subsidized prices.

Negotiations may stretch out for years, generating excessive expenses. Some negotiations have been concluded in as little as three or four months, however.

Foreign medical device companies are restricted from withdrawing registered capital during the life of the contract.

Termination and liquidation of EJVs have only recently been fully addressed by laws and regulations.

Contractual Joint Venture (CJV)
Maximum flexibility in structuring the assets, organization, and management.

Can recover registered capital throughout the life of the contract.

Can be established quickly to take advantage of short-term business opportunities and then dissolved with minimal legal restrictions.

Some detailed implementing regulations are still evolving.

May not have legal person status or may have limited liability if the enterprise is judged to be undercapitalized by the State Administration of Industry and Commerce.

Wholly Foreign-Owned Enterprise (WFOE)
Foreign medical device company has tighter control of proprietary interests.

Exclusive management control for investors; no need to compromise with partners.

Exemption from the 10% tax on dividends.

Implementing regulations have been promulgated, but are still evolving.

Fewer precedents to rely on during negotiations and operations.

No Chinese partner resource to tap for a trained workforce, and established sourcing, or distribution networks.

Stricter foreign exchange balancing requirements.

Higher corporate tax rate than equity joint ventures.

Source: Pacific Bridge, Inc.

There are three types of FIEs in China: Equity Joint Ventures (EJVs), Contractual Joint Ventures (CJVs) and Wholly Owned Foreign Enterprises (WOFEs). FIEs are advantageous because: 1) they help foreign medical device companies gain access to China’s domestic market while maintaining more control over their activities; 2) they help foreign medical device companies take advantage of China’s relatively well-educated, low-cost labor force; 3) they help improve access to local resources; 4) they receive favorable treatment from the Chinese government (for example, tax exemption, obtaining financing, securing support); and 5) they can overcome the difficulties with foreign exchange controls with greater ease.

If a foreign medical device company can determine that there is a large growing market for its products and is willing to invest and work to set up an FIE, then a joint venture or WFOE is probably the best long-term strategy to penetrate the Chinese marketplace. By physically being in China, foreign medical device companies can easily see the real needs of end users, and prices can be more competitive as a result of local manufacturing. Such advantages may override the complexities of setting up a WFOE, the time it takes to establish such entities and the associated risks involved. Figure 18, page 222 provides advantages and disadvantages of each of the three enterprise structures.

Foreign Investment Enterprises

JOHNSON & JOHNSON (J&J) and MEDTRONIC are two examples of U.S. medical companies that have set up FIEs in China.

J&J has been steadily increasing its consumer products, pharmaceutical, and medical device operations in China. As of June 1995, its total investment in China through joint ventures and manufacturing facilities totaled $100 million, and as of 1996, the company had created two wholly foreign-owned companies and three joint ventures. The company strengthens its presence in China by providing programs that educate the public about its products, by providing training for medical professionals, and by developing stronger ties with the government.

Figure 19: Selected Foreign Investment Enterprise Joint Ventures

FIE Type FIE Name Foreign Company Chinese Company/ Location Product(s) Involved
Keijian Corporation under Chinese Academy of Sciences/Shekou Ultrasonic equipment, patient-monitory equipment
Joint Venture GUANGZHOU PACIFIC BIOMEDICAL PRODUCTS PACIFIC BIOMEDICAL HOLDINGS (U.K.) Industry Development Co./Guangzhou Development Zone; Cardiovascular Research Institute, Guangdong People’s Hospital /Guangzhou Tianjin /Jinan Artificial heart valves
Shangdong Province Blood analysis equipment and disposable products

Source: Pacific Bridge Medical.

In 1985, JANSSEN PHARMACEUTICA, J&J’s Belgian subsidiary, entered the Chinese market in what was then the largest pharmaceutical joint venture in China’s history to date. Since then, XIAN-JANSSEN PHARMACEUTICAL CO. has been consistently named the top international joint venture in China. In 1990, J&J SHANGHAI LIMITED, a joint venture producing BAND-AID Brand Adhesive Bandages opened. In 1995, J&J MEDICAL (CHINA) LTD. started its first WFOE when it opened a factory in Shanghai.

MEDTRONIC, the market leader in China for pacemakers and several other product lines, entered the Chinese pacemaker market in the 1970s and has been building relationships with key physicians for over 20 years. The company believes that demand for its cardiovascular devices will continue to grow due to the adoption of advanced western medical therapies and techniques exhibited by many physicians in major Chinese cities.

MEDTRONIC set up a joint venture at Ning-bo with the Ning-bo Economic Technical Development Zone, one of 17 agencies established by the Chinese government to attract foreign investment and technology. In 1996, MEDTRONIC announced the first human implants of the Champion (Model 7302) Pacing System, the first implantable bradycardia device designed exclusively for China and other developing nations. Reportedly, the product provides affordable and reliable use along with minimal patient follow up requirements. MEDTRONIC also set up a WFOE $10 million manufacturing facility in Shanghai to produce its pacemakers.


JANSSEN PHARMACEUTICA—www.us.janssen.com
JOHNSON & JOHNSON—www.jnj.com
Ministry of Foreign Trade and Economic Cooperation—www.moftec.gov.cn
Pacific Bridge Medical —www.pacificbridgemedical.com
World Trade Organization—www.wto.org